Incidents of ownership
Incidents of ownership are rights a person holds in a life insurance policy, such as the right to change its beneficiaries or pledge it. For federal estate tax purposes, insurance proceeds payable to beneficiaries other than the estate can be included in the insured person's gross estate if the insured held incidents of ownership at death, alone or with another person. The term concerns policy rights.
How it works
Incidents of ownership are assessed by looking at the policy rights the decedent held at death. Federal rules include proceeds payable to beneficiaries other than the estate when the decedent held such rights, alone or with another person.
Rights to change a beneficiary or pledge a policy are examples described in practitioner commentary. Applicable state or other law can affect the policy terms used to determine whether a decedent held incidents of ownership.
A reversionary interest is an incident of ownership when its value was more than 5 percent of the policy value immediately before the decedent died.
Where it shows up for owners of businesses, real estate and private investments
Life insurance connected to a business, real estate holding or private investment can raise this issue when an owner is the insured person and a beneficiary other than the estate may receive proceeds. The relevant question is whether the insured held policy rights at death, alone or with another person.
A policy held in a trust can also involve incidents of ownership. Practitioners report that the IRS answered no on whether a grantor's nonfiduciary power to reacquire a trust-held policy by substituting equivalent-value assets causes inclusion, assuming certain guidelines are met.
Points that are easy to confuse
A beneficiary designation and a right to change beneficiaries are different concepts. Practitioners identify the right to change beneficiaries and the right to pledge a policy as examples of incidents that can matter under the federal estate inclusion rule.
Common questions
Can life insurance proceeds be included when they are payable to someone other than the estate?
Yes. Federal rules include insurance proceeds payable to other beneficiaries when the decedent held incidents of ownership in the policy at death, alone or with another person.
Does a trust-held policy always create incidents of ownership for its grantor?
A trust-held policy does not always create incidents of ownership for its grantor.